Creative cash and liquidity: How global companies are finding success in new methods

After years of cost-cutting in the wake of the Great Recession, global companies have a new problem to contend with: excess liquidity. By streamlining their operations, rightsizing their workforces and improving financial performance, firms are now sitting on large quantities of cash. American businesses alone are hoarding almost $2 trillion, reports the New York Times.

With historically low interest rates, it isn't clear where financial officers can find opportunities for their cash. But forward-thinking companies can still find opportunities to deploy excess cash as part of their liquidity risk management programs.

Just a few years back, treasurers turned to short-term investments in money markets and treasuries. But, as interest rates have hovered near zero for years, those investments have become less attractive. So, corporations are looking beyond the traditional investment set for creative solutions for their cash buildups.

The airline industry has long been exposed to rising cash levels. Operating inside countries with strict currency controls has trapped a lot of cash for the world's carriers. Nigeria and Venezuela, for example, have hundreds of millions and billions of dollars, respectively, of trapped airlines' cash from ticket sales inside their countries. To address rising cash levels on the Indian sub-continent and Africa, Etihad Airways has turned its focus inward as part of its liquidity risk management.

From its home hub in the United Arab Emirates, the company flies to over 100 destinations around the world, moving 13 million passengers a year. That creates a lot of complexity in fuel operations. The airline also worked with more than 40 relationship banks and had more than 300 bank accounts. Using different technology platforms to track commodity and FX exposure only compounded the problem for one of the world's fastest growing airlines.

To address these issues, the company created a Cash and Working Capital team. Charged with implementing a strategic vision, the team convened a new working group, the Group Liquidity Committee, from across the business. Etihad has since developed tools to help identify and measure associated risks. The airlines devised a system that could report on its cash flow and fuel position without the need for teams to spend hours downloading data and reconciling spreadsheets.

By moving to a single system that integrated directly with the airlines' ERP and dealing platforms, Etihad's financial managers can now perform real-time scenario and volatility analysis. The changes the airline has made are tangible — the company has won awards for its cash management systems and has seen millions of dollars in cost benefits.

Embarking on this type of program isn't easy, as it requires breaking down silos and getting different parts of a company — with different incentives — to work together. Legacy technology platforms, given their size and cost, can also prove to be an impediment to platform consolidation as companies frequently choose to keep patching things together rather than rip off the technology band-aid.

The world's eighth-largest producer of polyethylene and polypropylene has taken a different approach to its rising liquidity. The Borealis AG has been working externally with its suppliers on a creative strategy via financial technology firm C2FO. As part of the program, Borealis automatically adds all its invoices to C2FO. There, a supplier can select an invoice and how much it's willing to discount that invoice to receive early payments.

"For a small discount, you can receive early payment directly from Borealis to improve your cash flow at rates that are often less than the cost of borrowing short-term working capital," wrote Jan-Martin Nufer, Borealis's director of treasury and funding, in a letter to his company's suppliers. "The best part about C2FO is you determine your early payment offer, so you're in control. If your offer is accepted, Borealis will initiate early payment within 72 hours."

Dynamic discounting, as this type of financing arrangement is called, gives buyers more flexibility in their terms of payment to their suppliers in exchange for a lower price or discount for the goods and services purchased. This type of program can also be beneficial for suppliers who value cash flow over margins. Borealis's cash management solution eliminates much of the risk of traditional investing by using short-term cash and debt borrowings to pay approved supplier invoices early at a much higher rate of return. Getting suppliers and customers working together on supply chain financing doesn't only strengthen their relationships — it makes real financial sense for idle cash. C2FO claims its partners receive a 7.6% APR on their cash on a 21-day duration on average.

Dynamic discounting doesn't work particularly well, however, in a supply chain without a big buyer with enough clout to influence terms and pricing. In a higher interest rate environment, returns may be better in more traditional investments.

Choosing between programs isn't easy. Implementing liquidity risk management really requires a thorough cost-benefit analysis. Dynamic discounting works particularly well for large buyers during a period of low interest rates. Technical debt is a real thing to address — companies continue to choose easier, cheaper short term solutions over building better, more comprehensive solutions for their cash and risk management.

Just a decade ago, the economy suffered a generational shock. Companies clung to their cash positions in order to ride out the storm. Now, flush with cash, companies are looking to deploy liquidity, but they're finding few traditional options worth the investment. Companies like Etihad Airlines and Borealis are taking creative approaches to their excess liquidity and finding success in these novel methods.

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